Analysts give their view of what the future holds for Game Group, after the
computer games and console retailer issued a profit warning.

"Whilst expectations for Game Group were never high, this morning’s profits warning will come as a bitter blow for CEO Ian Shepherd.

Despite a slew of decent titles over recent weeks (incl Call of Duty), LfL [like-for-like] sales are still down 2.9% over the last 7 weeks which means for the year as a whole LfL sales are -8.6% and remain well below management expectations.

Intense competition has resulted in gross margins being down 150bps some 50bps worse than previously expected.

The combination of lower sales and deteriorating gross margins means than Game will report a pre tax loss of £13m this year, a significant reversal from the £12m profit we had been hoping for.

We understand that cash is being closely controlled but this is clearly a very worrying development for long suffering shareholders and we expect the shares to come under real pressure.

Whilst Game continues to outperform the market, the deteriorating conditions will raise questions about whether the downsizing of the estate has been radical enough. Hold."

Kate Calvert at Seymour Pierce:

"Despite a strong release schedule, the strength of the overall gaming market is below Game’s expectations and gross margin pressure has been greater due to mix. The general weak consumer backdrop has not helped with footfall down double-digit.

The group is now expected to report a loss for the year despite taking market share. With visibility on consumer demand and the fourth generation product cycle poor, we maintain our SELL recommendation and cut our TP to 10p."

John Stevenson at Peel Hunt:

"While LFL declines for the past seven weeks have improved to [a loss of] (2.9)%, this is not strong enough to meet market expectations. Taking a tough view on Christmas, new guidance points to a full-year loss of £10.7m.

Despite such downgrades, the medium-term strategy remains on track and new hardware launches for 2012-3 underpin market recovery.

While the market backdrop is poor, Game continues to take market share. Digital revenues are up >40% yoy, store closures (net 37 YTD) are on track and conversion, pre-owned sales and multi-channel have made progress this year. For 2012/3, the Nintendo Wii U will provide some much need momentum to the hardware cycle, with expectations of a new X-Box being announced next year also building.

In 2006 Game’s PBT fell c72% yoy to £8m in a stream of downgrades before recovering strongly into the next console cycle. With new hardware to come, we remain confident that the market and Game will recover once again, although we have cut our TP to 20p and recommendation to Hold to reflect today’s downgrades."

Sanjay Vidyarthi at Execution Noble:

"It is worth noting that Game is still targetting a y/e net cash position of around £120m (average net debt through the year likely to be c. £60m). Working capital, both stock and creditors, is being tightly controlled and should still provide an inflow. Game is not in a position where creditors are tightening their terms, as far as we can see - Game remains the main route to market for many.

Longer term strategy continues to make sense, but it is difficult to see when the short term pain ends. Estimates under review. We maintain our Sell recommendation."